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Choosing Between a Secured and Unsecured Credit Card

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Credit cards can be found in nearly every wallet and purse in America, so most small business owners with good credit already have access to that type of financing. But what can you do as an entrepreneur if your credit score isn’t the greatest? Should you get a secured credit card? Read on to learn the difference between unsecured and secured credit cards and which one is right for your business’s situation.

What is a secured credit card versus an unsecured credit card?

Since their inception in the 1950s, credit cards have been a common payment method for most Americans. In fact, a report by WalletHub using data from the U.S. Census Bureau and Nilson Report found that there were approximately 1.12 billion credit cards in the U.S. as of 2018. By 2023, that number is expected to go up to nearly 1.3 billion.

The report also estimated that the average number of credit cards per U.S. adult was just over three in 2019, with an average total balance of $6,629. And while Experian estimates that the country had approximately $830 billion in credit card debt in 2019, most of that is held through unsecured credit cards. [Read related article: Do You Need a Small Business Credit Card?]

The difference between a secured and unsecured credit card

On a very basic level, the major difference between these types of cards is that a secured credit card requires some sort of monetary deposit to act as collateral, while an unsecured credit card doesn’t. An unsecured card generally has lower interest rates and higher credit limits, while a secured card can serve as a way for people with bad credit to boost their credit scores.

Unsecured credit cards: The common option

If you have a credit card right now, the odds are extremely high that it’s unsecured. While the term “unsecured” may sound risky for you as a consumer, it more accurately describes the risk that the card’s issuer has taken on, since it acts similarly to an unsecured bank loan and does not require a deposit or other form of collateral.

Without the additional assurance of collateral from you, the terms of an unsecured credit card depend largely on your credit history. If you apply with a good credit score, you’ll be more likely to get a higher credit limit, more favorable interest rates and additional perks, like travel miles and cash back. However, if you have a lower credit score and you try to get a credit card, the opposite will be true: You’ll receive a smaller credit limit, higher interest rates and little or no additional perks – if you get approved at all. What determines a “good” score and what constitutes a “bad” score vary among the three credit bureaus: Equifax, TransUnion and Experian, though a score in the 700 range is typically considered a good place to start.

Rather than receive collateral to protect their investment, banks and credit card issuers reduce their risk by leveraging their ability to punitively affect your credit file if you regularly miss payments or overcharge your account.

In most instances, delinquent accounts are reported to the credit bureaus, resulting in a decrease in your overall credit score. Such an infraction on your record is considered a major issue to other creditors and remains on your file for years as a red mark for why you should be denied additional credit or loans.

Other courses of action for credit card issuers and delinquent accounts include taking your account to collections, seeking wage garnishments to offset their losses or filing a lawsuit against you. [Read related article: The Pros and Cons of Financing a Startup with Credit Cards]

Secured credit cards: The safe option for creditors

While unsecured credit cards pose a potential risk for card issuers, secured credit cards come with some assurances baked in at the expense of the borrower. Unlike an unsecured credit card, a secured credit card requires the cardholder to make a cash deposit that the credit card company holds as collateral.

That deposit usually sits in the $200 to $300 range and will act as the card’s available credit limit. Naturally, a higher deposit will yield a larger credit limit. This deposit is a one-time cost to the borrower that can be refunded once they’ve either proved their ability to maintain the account in good standing or the account is closed.

Because these cards are backed by collateral, banks and credit card issuers are more likely to approve applications for all kinds of users, including people with no credit or low credit scores. As a result, these cards are generally seen as a safe, yet slow way to build a credit score. [Read related article: Opening a Business Account When You Have Bad Credit]

“If you miss a payment on a secured credit card, the money is simply taken out of your security deposit, and the missed payment is not reflected on your credit report,” said Michael Broughton, co-founder and CEO of Perch. “If you do carry a balance, interest will be incurred, and the balance will be reported to the bureaus just as it would with an unsecured card. Using a secured credit card can help some build their credit in as little as six months.”

Like unsecured credit cards, unpaid bills result in punitive actions that could lower your credit score. A late payment usually comes with an additional fee before getting a higher interest rate tacked on. The longer your payment is past due, the higher your rate will go, until the card is closed and you lose your deposit. Eventually, the account will be sent to collections, at which point your assets could be in jeopardy.

What are the benefits and drawbacks of secured and unsecured credit cards?

Aside from their collateral requirements, unsecured and secured credit cards come with their own inherent benefits and drawbacks. In the case of both cards, you can potentially raise your credit score by diligently making your payments on time, though the other side of that statement is also true. Both cards also give you access to capital that you didn’t already have on hand, and both prove your creditworthiness in some way.

And while the two credit card types share some benefits, they also share downsides. For instance, both card types can lead to collections agencies getting involved if your account is unpaid by 120 days, though if that happens, both card types will have negatively impacted your credit score well before then. Additionally, both unsecured and secured credit cards can require a “hard pull” on your credit file when you apply for a card, resulting in a potential hit to your score. This issue is somewhat less likely to happen with secured cards, since they require collateral.

Though unsecured cards generally have lower interest rates, they can still be quite high. As previously mentioned, average rates can be upward of 20%. If you’re making just the minimum monthly payment with a high APR, you’re likely not making much of a dent in your principal. Likewise, if you’re not paying off your card in full each month, a high APR means you’ll pay more than the initial cost of whatever you purchased with the card.

Benefits of an unsecured card

As unsecured cards are the most common type of credit card, you’re likely already familiar with many of their advantages. Here are some of the pluses of using an unsecured credit card responsibly:

Lower APR. If you have an unsecured credit card, it’s likely that you have a decent credit score. As a result, a bank or credit card issuer will feel more comfortable offering you a lower interest rate. Because a lower interest rate means your monthly payments will be smaller, it serves as an incentive to continue using the card. With a lower rate, you can continue to build credit by stretching your limit a little further.

Though unsecured cards’ interest rates are generally lower if you have a good credit score, the rates are still often higher than those for most small business or personal bank loans, averaging between 15.53% and 22.76%, U.S. News reported.

Higher credit limits. Again, because you likely have a reasonable credit score, you will likely be trusted with a higher borrowing amount. With an increased credit limit, you instantly gain access to bigger-ticket purchases without fear of getting too close to that limit.

A larger credit limit also affects your overall credit utilization ratio, which is the amount of credit available to the user versus the amount of debt they’ve incurred. Credit bureaus use your utilization ratio as a metric to see how responsible you are with your credit. A higher percentage of credit used may indicate to lenders that you’re a costly and potentially risky borrower.

More card options. As this is the most common type of credit card, your options vary wildly. Credit cards are issued by so many entities, from national and local banks to individual retailers, that it’s very likely that you can find an unsecured card that fits your needs.

Rewards for using credit cards. Credit card issuers want borrowers to use their cards, since they make money on the interest and any additional credit card fees. One way they often do that is by offering special rewards to their users. If this is a major selling point for you, then be on the lookout for cards that offer cash back, discounts at certain businesses when using the card or travel mileage that can be redeemed for airfare, among other perks.

More frequent reports to credit bureaus. Credit card usage is just one part of your overall credit score, but it’s among the most heavily weighted items. Because your unsecured credit cards represent risk to card issuers, they often report the health of your credit card usage to credit bureaus on a monthly basis. This kind of granular influx of data can help you understand how you’re doing and provide you with ways to improve your score. This can often become a double-edged sword, however, since late and missed payments are also reported frequently.

Drawbacks of an unsecured card

Though an unsecured card has many benefits, there are also some negatives to having or trying to obtain one. Here are some of the drawbacks:

Different requirements for each card. Because unsecured cards are ubiquitous, it’s increasingly rare to find two credit cards that have the same requirements for approval. Credit score requirements vary from issuer to issuer, so whereas one card may require a 580 credit score for consideration, another may demand a score of 700. This kind of variance means you’ll have to do your research about not just your credit score but also what that score needs to be to obtain the card you want.

Added fees. Depending on the type of credit card you use, there may be additional fees baked into your agreement. The most common fee added to an unsecured credit card is an annual “convenience” fee, which can range from $20 to $200. There are enough cards on the market that don’t charge an annual fee, so you can avoid this drawback simply by choosing a card without one. Other fees – like late payment fees, balance transfer fees and cash advance fees – should be expected if you meet the requirements for those fees.

Benefits of a secured card

Though a secured card requires you to deposit money as collateral, this type of card has some unique benefits. Here are some of the advantages:

Refundable deposit. As long as you consistently make payments on your account and eventually pay off the balance in full, your deposit is refunded to you. This can help serve as a goal to keep in mind as you’re using and paying back the card over time.

Credit building. If you have a bad credit score, it will be nearly impossible to get a decent unsecured credit card without exorbitant interest rates and minuscule credit limits. By requiring collateral of some kind, credit card issuers are more likely to approve individuals with bad credit as a way to help them get out of the hole they’ve dug themselves into. In some cases, the secured card can eventually get upgraded to an unsecured card. Keep in mind that a secured card only reports payment history, resulting in a slower climb.

Drawbacks of a secured card

Here are some of the downsides to be aware of before getting a secured credit card:

Required deposit. As previously mentioned, to get a secured credit card, you must make a cash deposit of up to $300. If you need a higher credit limit, you may have to add more money to your deposit.

Smaller credit limits. Credit limits for secured cards are usually just the security deposit you put down. As such, your credit utilization ratio will be much tighter than with an unsecured card.

Additional fees. Like unsecured credit cards, secured cards often have a range of additional fees tacked on, such as monthly maintenance fees, annual upkeep fees or incidentals. These are nonrefundable and can add to the overall cost of the card.

Lack of reporting to credit bureaus. Not all secured credit card issuers report these cards to the three bureaus. If you’re relying on such a card to help build your credit, it’s imperative that you make sure the card issuer reports the account’s activity, since not doing so will make your efforts entirely moot.

Which type should you choose?

When deciding which card you should get, consider where you are in your credit score journey. While an unsecured card may be great if you’re just looking to maintain or increase your already decent credit score, a secured card could help you get out from under a bad or nonexistent score.

“Both secured and unsecured credit cards have their advantages, but the need for each depends mostly on your credit score and your financial goals,” Broughton said. “If you have trouble with qualifying for an unsecured card, a secured card is your best option for credit building through a card.”

While most people will want to obtain an unsecured card, a secured card should most often be considered only if you have zero credit history or your credit score is too low for an unsecured card.

When choosing between the two types of cards, the business owner should consider the current marketplace and potential issues they could face, said Matthew Dailly, managing director of Tiger Financial. “Having a secured credit card could really help to protect them if something comes along which stops their income – COVID-19 being the perfect example.”

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Can You Return a Financed Car Back to the Dealer?

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Returning a vehicle to a dealership isn’t as simple as returning a shirt that didn’t fit right. If you’re in a position where you need to return a car, you may have a few options, but your loan balance plays a key role in what you can do.

Returning a Car to a Dealer

Can You Return a Financed Car Back to the Dealer?The hard truth is that most auto dealers aren’t going to let you return a vehicle that you’re financing. Some dealerships have a return policy – sometimes around a seven-day guarantee when you’re financing a car sight-unseen without a test drive – but most don’t offer one. It won’t hurt to give your dealer a call and ask, but most franchised dealerships don’t have return policies.

When you finance a vehicle with an auto lender, the car’s title has a lien on it, which names the lender as the lienholder. This gives them ownership rights, and prevents you from transferring ownership of the vehicle until the loan is paid off.

Once the loan is complete, the lien is removed and the car is yours. If you need to get out of the auto loan before your loan term is over, you can sell the vehicle privately and pay off the car loan. Selling the vehicle to a private party may get you enough money to remove the lien and relinquish yourself from the auto loan pretty easily. You wouldn’t be returning the car to the dealer, but you can get out of the auto loan this way.

If you try to sell it back to the dealership, they may not offer you enough money to cover your loan balance. Trade-in values are typically less than the actual cash value (ACV) of the vehicle.

If you find yourself in a negative equity position where you owe more on the car loan than the vehicle is worth, you may have a more difficult time selling the car early to repay your loan. However, if you’re in this position, you still may have a way to get out of the loan and get into another vehicle.

Rolling Over Your Auto Loan

Some auto lenders offer loan rollovers. Put simply, you add the remaining balance of your current car loan onto your next one.

It works like this:

You have an auto loan with a balance of $15,000, and you want another vehicle that’s selling for $16,000. You sell your car back to the dealer because it’s not the right fit for you, but the dealership only offers you $10,000 for it. That $5,000 still needs to be paid, so it’s added to your next auto loan balance of $16,000, turning the balance into a grand total of $21,000.

While you got to sell your vehicle and get into something else, you’re starting out a loan with a lot of negative equity. If you need to sell this next car for something else, it means you may have to roll over negative equity again … and maybe again. This is called the trade-in treadmill, and once you get running on it, it’s hard to get off.

Rolling over negative equity onto your next auto loan should be considered one of the last resorts if you really need to sell your vehicle. However, there is one actual last resort if you want out of your car loan.

The Actual Last Resort: Giving the Vehicle Back

If you can’t sell the vehicle to a private party, a dealer won’t buy it, and you don’t have the option to roll over your auto loan, then you may have to consider voluntarily surrendering the car to the dealership.

This is commonly called a voluntary repossession. Voluntary or not, it’s classified as a repossession on your credit reports. Once you return the vehicle, it’s considered a default because you’re no longer making payments. The car is then prepped to be sold at auction, and the proceeds from that are applied to your remaining loan balance. If the loan isn’t completely paid off, called the deficiency balance, you still owe that to the lender.

Having a repossession listed on your credit reports, and the possibility of still owing your lender money after the auction sale, is why a voluntary repo should be considered a last resort. You may be better off to continue making the payments on the vehicle, since a repo can make it difficult to get into another auto loan with most lenders for at least one year.

Refinancing Your Car Loan

If you’re thinking about returning your car to the dealer because you can’t afford the payments, but still want to keep the vehicle, then consider refinancing the auto loan after one year. Most refinancing lenders consider a car loan for refinancing after hitting that one-year mark.

Refinancing is replacing your current auto loan with another one, hopefully with better terms. Nearly everyone that refinances is looking for a more affordable monthly payment. Refinancing can give you the chance to qualify for a lower interest rate than what you initially got, and it could give you the opportunity to extend your car loan, which lowers the monthly payment as well.

To refinance, you must have had your auto loan for at least one year, and lenders typically require that you haven’t had any missed or late payments on the loan. Generally, your vehicle should have less than 100,000 miles and be less than 10 years old to qualify, too.

If you think refinancing is the right path for you, click here for more information.

Need Another Auto Loan?

It can be stressful if you want out of your current car loan, or if you simply don’t want the vehicle anymore. This circumstance can be even more frustrating if you have poor credit. It can be tough to find auto financing with a lower credit score, but we’ve made it easier here at Auto Credit Express.

We’ve cultivated a network of dealerships that spans the whole country, and we want to look for a dealer that’s signed up with bad credit lenders just for you. Get started with zero-obligation and no cost whatsoever by filling out our free car loan request form. We’ll get right to work finding a local dealership that can assist people in unique credit situations.

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Bill prohibiting Virginia landlords from denying tenants with bad credit sent back to lawmakers | Virginia

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(The Center Square) – Legislation prohibiting Virginia landlords from denying tenant applicants because they accrued bad credit or were evicted for the inability to pay rent during the COVID-19 pandemic has been sent back to the General Assembly with a technical amendment from Gov. Ralph Northam. 

The amendment does not change the substance of the bill, but it provides clarification. Lawmakers are expected to approve the amendment.

House Bill 5106 would apply to tenants who received bad credit or were evicted between March 12 and 30 days after the governor’s state of emergency ends. It would apply only to landlords who own more than four dwelling units or who have at least a 10% interest in more than four dwelling units.

The bill was sponsored by Del. Joshua Cole, D-Fredericksburg.

Northam also proposed an amendment to a bill last month that would require landlords to provide a payment plan before they can evict tenants. This bill has the same exemption for smaller landlords.

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Bad Credit Mortgage Lenders | The 6 Best Lenders Of 2020

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Bad credit? These lenders might be able to help

Just because your FICO score isn’t as good as you’d like, doesn’t mean you’re stuck with a bottom-tier mortgage lender.

In fact, some of the very best lenders out there are willing to help borrowers with credit scores near or below 600.

Of course, not everyone will qualify. And your rate will be higher than a “prime” mortgage borrower.

But you can still shop around for the best interest rate, fees, and customer service, just like any other home buyer.

Here’s where we recommend starting your search.

Get matched with a mortgage lender (Nov 27th, 2020)

Company Minimum Credit Score Stands Out For 
New American Funding 580 Low credit minimum, top-rated service
Guaranteed Rate 580 Lowest rates on average
Freedom Mortgage 540 Low credit minimum
loanDepot 580 Fully-online lending
Caliber 580 Highly rated customer service
Navy Federal Credit Union* 580 but exceptions possible Flexible credit requirements for veterans

Get matched with a mortgage lender (Nov 27th, 2020)

*Navy Federal Credit Union only serves veterans, active-duty service members, and select military-affiliated personnel 

Editor’s note: The Mortgage Reports may be compensated by some of these lenders if you choose to work with them. However, that does not affect our reviews. See our full editorial disclosures here.


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The 6 best bad credit mortgage lenders

1. New American Funding 

We liked New American funding when we wrote its full lender review. And we still do. But what gave it our #1 slot?

To start with, New American Funding (NAF) examines each mortgage application on its own merits rather than taking a tick-box approach.

That means it can sometimes be more sympathetic to those who’ve had financial problems in the past, including credit issues.

Additionally, NAF offers:

  • Competitive mortgage rates, on average
  • Strong customer reviews and very few complaints
  • A wide range of types of mortgages, including FHA loans with a minimum credit score requirement of 580.
  • Flexible customer service: in-branch, online, by phone, or any combination
  • Fast turnaround. NAF says, “We guarantee that your loan will close in 14 business days. Period,” according to its website (this includes purchase mortgages only; not refinances)
  • A constructive approach to down payment assistance programs
  • An A+ rating with the Better Business Bureau (BBB)
  • A bilingual call center with English and Spanish

The only big drawback to New American Funding is that it’s not licensed to lend in New York state or Hawaii.

But if you live in any of the other 48 states, this lender is likely worth a look for a bad credit home loan.

2. Guaranteed Rate

Guaranteed Rate may not be quite as skewed toward borrowers with bad credit as New American Funding. But it still approves applications from people with scores as low as 580.

And it’s strong in other respects:

  • Highly competitive mortgage rates and origination costs
  • Excellent reputation for customer service and few complaints
  • A comprehensive range of mortgage products
  • Licensed to lend in all 50 states
  • A+ BBB rating
  • 300-strong branch network if you prefer to work face to face
  • Highly praised technologies deliver a good online experience

Guaranteed Rate had the second-lowest average mortgage rate among our top lenders in 2019. (The lowest of all was Navy Federal Credit Union, but it’s only available to veteran and military borrowers.)

Of course, if your credit is on the low end, your rates will likely be above average.

But when you start with a lender that’s known to offer low rates, you may have a better chance at getting a good deal.

Verify your new rate (Nov 27th, 2020)

3. Freedom Mortgage

Although Freedom Mortgage is an expert at VA loans (those for veterans and service members), it offers a good range of other mortgage products.

Freedom Mortgage may even approve FHA loans for some borrowers with scores as low as 540. Here’s what else you need to know:

  • Rates are generally competitive, though average loan fees are a bit higher than some other lenders on this list
  • Takes into account “non-traditional credit histories.” So if you have a sparse credit history, it may look at on-time payments for things like rent, utilities and so on, which don’t typically appear on credit reports
  • Praised for customer service on many online forums
  • Traditional, personalized approach, meaning you can expect more face-to-face or phone encounters. There’s not much of an online experience
  • Licensed in all states and has branches in 26

It’s definitely worth getting a personal quote from Freedom, especially if you’re a veteran or service member in the market for a VA loan.

4. loanDepot

Like many on this list, loanDepot is a fairly recent, tech-first mortgage lender.

loanDepot has only been around since 2010, but during that time it’s grown to the fourth biggest mortgage originator in the US, largely on the back of its innovative lending technologies.

Here’s the lowdown:

  • Minimum credit score of 580
  • The 5th highest score in J.D. Power’s 2020 mortgage origination satisfaction study and an A+ BBB rating
  • Typically has very fast loan processing with many parts of the lending process automated
  • Not the lowest rates or fees on our list, but generally competitive
  • Higher rate of CFPB complaints than most on our list
  • Licensed in all states with branches in 43 states
  • A wide portfolio of loan types

If you’re a big fan of technology and prefer an online application process, loanDepot may be a good option for you.

5. Caliber Home Loans

Caliber delivers a much more personalized and engaging sort of customer service than those who encourage more online interactions.

It has some slick technologies in its back office and may offer faster-than-average closing times. But you’ll be dealing with a person rather than a screen.

Here’s what to expect from Caliber Home Loans:

  • Competitive rates and costs
  • Minimum credit score of 580
  • Few customer complaints to the CFPB
  • Good customer reviews online
  • An A rating from the BBB
  • Licensed in all 50 states
  • Happy to work with down payment assistance programs
  • Great range of types of mortgages

If you prefer to work with humans rather than computers, Caliber is a shoo-in for your shortlist.

6. Navy Federal Credit Union 

Navy Federal Credit Union is a special case. To start with, it’s a credit union, and only members can get loans from it.

Navy Federal membership is restricted to veterans, service members, and others with close affiliations with the military. For that reason, it’s a specialist in VA loans.

For those who are eligible for membership, Navy Federal Credit Union offers:

  • The lowest average mortgage rates and fees on our list (though part of that can be chalked up to its focus on VA loans, which have lower interest rates)
  • No minimum credit score. Navy Federal says, “A member’s approval isn’t determined by just one number — but by several factors,” meaning it will likely consider lower scores with compensating factors and non-traditional credit histories
  • Highest J.D. Power customer satisfaction score on our list
  • But also the highest proportion of CFPB complaints
  • A+ BBB rating
  • No FHA or USDA loans. If you’re not eligible for a VA loan, you may need to look elsewhere
  • Good online services, including an app that lets you track your loan application’s status

If you’re eligible for membership and a VA loan, you’ll want Navy Federal on your shortlist.

Get matched with a lender (Nov 27th, 2020)

What’s considered ‘bad credit’ for a mortgage? 

We’re talking about bad credit mortgage lenders here. But what exactly is “bad credit”?

Many lenders follow the scoring model from FICO, the company that created the most widely used scoring technologies. It reckons that anything below 580 counts as “poor.”

If your score is in the 580-669 range, it’s actually considered “fair.” If it’s between 670 and 739, it’s “good” — and anything above that is “exceptional.”

  • Below 580 — Bad credit
  • 580-669 — Fair credit
  • 670-739 — Good credit
  • Above 740 — Excellent credit

However, it’s important to understand that the definition of “bad credit” can vary, because lenders are free to define their own score ranges how they like.

That means what one lender considers a bad credit score could be perfectly acceptable to another lender.

Just because your score is in the poor range, that doesn’t mean you can’t get approved for a mortgage. But you’ll likely need a sizable down payment and a good story that explains your low score and shows that its cause is in your past.

You’re also likely to have to seek out a sympathetic lender. And that’s where our list of the best bad credit mortgage lenders can come in handy.

Verify your mortgage eligibility (Nov 27th, 2020)

How a low credit score affects your mortgage 

Even if you’re approved for a loan, a low score means you’re going to pay a higher mortgage rate than someone with a better score. That part is unavoidable.

How much higher? FICO has a calculator that could give you an idea. It actually doesn’t go below 620, but it can give you a feel for the difference a credit score makes.

Here’s how the numbers looked for a $250,000 mortgage (though keep in mind that these will vary as mortgage rates change daily):

Credit score range Estimated APR* Monthly payment Total interest paid over 30 years
680-699 2.757% $1,020 $118,000
660-679 2.971% $1,050 $128,000
640-659 3.401% $1,100 $149,000
620-639 3.947% $1,200 $177,000

*Interest rates and payments were sampled in November 2020 and may not reflect current market rates

The monthly differences may look small. But you can see that even paying just $30 more per month, your total interest costs go up by $10,000.

As credit scores go lower, the difference in interest rates and payments grows.

Verify your new rate (Nov 27th, 2020)

Bad credit mortgage loan options 

Of course, you’re not just seeking out the best lenders for people with bad credit. You need a type of mortgage that can accommodate your needs. Here are the main ones:

  1. FHA loans — FHA loans, backed by the Federal Housing Administration, are the most popular option for borrowers with bad credit. Most borrowers need a minimum credit score of 580 and a 3.5% down payment to qualify. But if you can make a 10% down payment, you may be approved for an FHA mortgage with a credit score of 500-579
  2. VA loans — VA loans have no formal minimum credit score. But most lenders want at least 620. Some go as low as 580. And a few, such as Navy Federal Credit Union, don’t specify a score and may be sympathetic if yours is low for a good reason. We excluded Veterans United from our list because it wants a 660 credit score or better
  3. USDA loans — USDA loans typically require a credit score of at least 640 — so they may not be the best for low-credit borrowers. But if your score is high enough, you can use a USDA loan to purchase a home with no down payment
  4. Non-conforming loans — These loan programs, for which banks and lenders set their own rules, may allow credit scores below 600

Conventional mortgages — loans that conform to standards set by Fannie Mae and Freddie Mac — require a minimum score of 620 and a 3% down payment. That’s why FHA loans are more popular among those with lower credit scores.

Non-conforming loans do not meet the standards set by Fannie Mae and Freddie Mac, meaning they’re not eligible for backing from those agencies.

As a result, non-conforming loans typically have higher interest rates — but they may be available to borrowers with low credit scores.

Pick the type of loan that suits you best. If you’re eligible for a VA loan, it’s likely to be one of those.

Find the right home loan for you (Nov 27th, 2020)

Credit score vs. credit report

It’s easy to fixate on your credit score — the single number that represents your reliability as a borrower.

But mortgage lenders don’t just look at this number. They also do a thorough review of your credit report.

Your credit report shows your full history as a borrower.

If you have a low score because of a past event — like a foreclosure — but you’ve been a reliable borrower since then, lenders might be more forgiving.

On your credit report, lenders want to see:

  • A history of on-time payments
  • Reasonable credit usage (below 30% of your full credit limit is best)
  • No new credit lines opened near the time you’re applying for a mortgage

Refinancing with a low credit score 

How easy it is to refinance with bad credit will depend on your current loan type, and what you want your refinance to achieve.

Streamline refinancing

If you currently have a government-backed loan, you may be in luck.

FHA, VA, and USDA all offer Streamline Refinance programs that do not require credit score approval. However some lenders check credit anyway, so you’ll have to search for one that doesn’t.

To use a Streamline Refinance, your new loan must be the same type as your current one — for instance, refinancing a VA loan to a VA loan, or FHA to FHA.

Conventional loan refinance

Conventional refinances, like conventional home purchase loans, require a credit score of at least 620.

If your current mortgage is a conventional loan and your credit score has fallen, you may be eligible for an FHA refinance. However, FHA loans require expensive mortgage insurance. This could eat up enough of your savings that refinancing isn’t worth it.

Cash-out refinancing

If you want a cash-out refinance, you’re likely to need a higher credit score.

FHA cash-out refinancing typically requires a credit score of 600 or higher. And a VA cash-out refinance will often require at least 620.

If you currently have a conventional loan but your credit score isn’t high enough for a conventional cash-out refinance, an FHA cash-out refinance might help you access your home equity.

Verify your cash-out refi eligibility (Nov 27th, 2020)

What to do if your credit score is too low for a home loan

The obvious way to get a mortgage with bad credit is to improve your score. You may be surprised how quickly you can make a material difference.

For tips on how to raise your credit score fast, read our Guide to improving your credit score.

There are other ways to qualify for a mortgage with bad credit, too.

  1. Pay down as much existing debt as you can — If you’re a more attractive borrower in other respects, lenders may be more forgiving about your score. Paying down existing debts, like credit cards and auto loans, improves your debt-to-income ratio. This has a big impact on your home loan eligibility
  2. Build up your savings — Making a bigger down payment can also help your case, as it reduces your risk to the mortgage lender. Borrowers with a cushion against financial problems are less likely to default. If you’re able to make a 20% down payment, a low credit score might not matter as much
  3. Qualify on a friend’s or relative’s good credit — If you can get someone with good or great credit to co-sign your mortgage application, your problems may be over. But it’s a huge ask because your loved one could lose a lot of money and creditworthiness if your loan goes bad

We wouldn’t recommend asking for a co-signer in any but the most exceptional circumstances, because this can be a huge risk to the person helping you out. If your loan defaults, they’re on the line for the money.

Instead, we recommend steadily building up your credit score.

Even if you can’t pay off big debts in full, making on-time payments and keeping your credit usage under 30% can go a long way toward improving your score and boosting your mortgage eligibility.

How to find the best mortgage rate with bad credit 

Some lenders specialize in “top-tier” borrowers, who have excellent credit scores, bulletproof finances, and large down payments.

But other lenders, including the six on our list, are perfectly comfortable helping those with damaged credit.

So shop around to see who can offer you the best deal. And if one lender turns you down, don’t assume they all will — because that’s not how mortgage lending works.

Each lender’s business priorities can change from day to day. And different lenders offer different deals.

So putting some effort into comparison shopping could find you the loan you want at the best rate you can get.

Verify your new rate (Nov 27th, 2020)

Review methodology

To find the best bad credit mortgage lenders of 2020, we started by looking the 25 top lenders on a 2019 market share report from federal regulator the Consumer Financial Protection Bureau (CFPB). We also looked at a few major online lenders, as these companies are growing in popularity.

We whittled that down to our six best by filtering out lenders that required credit scores over 580; charged higher mortgage rates than the average among all top lenders; or didn’t offer FHA loans, because many home buyers with poor credit rely on those.

And we took other factors into consideration. Did a lender have a disproportionate number of customer complaints filed with the CFPB? Did it get too many negative customer reviews on online forums? Did it receive a bad rating from the Better Business Bureau? Did it do well in the J.D. Power 2020 U.S. Primary Mortgage Origination Satisfaction Study?

We didn’t automatically exclude lenders based on those last four. But you’ll find the details as you read the following reviews of each of our finalists.

Verify your new rate (Nov 27th, 2020)

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